Sugar Tax: A bitter pill to swallow

During his highly anticipated Budget Speech (24 February 2016), Finance Minister Pravin Gordhan announced the implementation of sugar tax, effective 1 April 2017.

The Minister of Health, Dr Aaron Motsoaledi, recently announced the goal to reduce South Africa’s obesity prevalence by 10% by 2020. The Ministry committed to commission a review of policies and regulations related to the control of obesity in South Africa.

Imposing a sugar tax could have a detrimental effect on the economy and could lead to increased unemployment due to the impact on production as a result of decreasing private domestic consumption. This all depends on the price elasticity of demand and the additional employment created in the health and sugar-alternatives sectors.

Whether sugar is the main scientific reason for obesity must be weighed up against the health and economic benefits (increase in production and balance of payments) of sugar. This is a medical question which needs to be answered first.

The media recently ranked South Africa second for deaths as a result of the consumption of sugary drinks. Again, this is a debate for the medical profession. Should this statistic be medically correct and scientifically supported, it is alarming and action would need to be taken to reduce the mortality rate caused by sugar consumption.

Be that as it may, the real question and final analysis would be what the economic impact of a smaller sugar industry would be and, if widely supported that it should be reduced, whether the tax system is the correct instrument to achieve this.

The fiscus could tackle this on the corporate tax side by introducing special rules to producers and suppliers of sugar. Using the corporate tax system to dis-incentivise economic activity in a specific industry without sound economic policy principles will be ill-advised.

The alternative would be to impose a consumption tax on sugar, which would leave an option between excise duties (perhaps) or a special VAT imposition. Neither of these options seem to have merit, considering that excise duties and special VAT impositions are theoretically (potentially) only supported in case of so-called ‘sin’ taxes or luxuries.

It is generally accepted that tax should be imposed on as broad a base as possible with limited or no exceptions and that incentives or dis-incentives are more effectively implemented outside of the fiscal system, with the caveat that the country has the required infrastructure.

Mexico’s 10% sugary drinks tax, apparently resulted in a 12% sales reduction in one year. The introduction of a similar tax in South Africa could possibly have a similar effect, although factors such as the price elasticity of demand and the ratio of domestic produce versus importation will impact this figure.

Professor Mike Rayner from Oxford University highlighted that a sugar tax could have unintended consequences, for example, consumption of salt as a substitute for sugar may increase and this will negatively impact health.

The politician Wilmot James expressed the view that a sugar tax will adversely impact the poor as they do not have the means to purchase alternatives. As a result, it was suggested that the Minister should focus on diet and exercise interventions, especially in townships. It was also suggested that the 10% reduction target will not be attained in the projected five years proposed.

Well-known Chef Jamie Oliver supports a sugar tax on fizzy drinks. As an alternative Oliver suggests the use of clearer labelling to enable consumers to know how much sugar they actually consume.